Thursday, June 30, 2011

Now that California has managed (sort of) to resolve its annual financial crisis by passing a budget, many thinkers and pundits are turning their sights to the future. Since we like a good thought piece as much as anyone, we thought we'd offer our thoughts on where the state is heading, and what sorts of political developments we could see in the next few years. So, without further ado, here are five predictions for the future of California.

1. Pension costs will decimate governments at all levels, and it might happen sooner than you'd think. While underfunded pensions are a problem in many, many local governments in California, we couldn't help but be struck by Wayne Lusvardi's latest piece over at Cal Watchdog. Discussing a recent New York Timesarticle on California pensions, he notes that many studies estimate that the state will need to designate $28 billion toward pensions in the very near future. Keep in mind that the entire general fund budget was $86 billion this year. Needless to say, this would obliterate government services at all levels. And this isn't even taking into account a point we keep raising: through questionable accounting practices, public funds like CalPERS almost certainly believe they have more cash and smaller liabilities than they actually do. We expect to see pension reform proposals on the ballot next year, but keep in mind that the courts generally view pensions as "vested benefits." As such, even if voters approve dramatic measures to claw back public retirement benefits, the measures will almost certainly end up in court, and they may not stand up to the challenge. So the Legislature's fateful 1999 decision to award "3-50" pensions to most state workers is probably not something we can get out of.

2. Austerity at the local level will become the norm, not the exception. We wrote recently about the grim future facing the city of San Jose, as it continues to shed services and employees in anticipation of a towering tsunami wave of pension debt. In the likely event that Mayor Chuck Reed's proposal to pull back retirement benefits by a ballot initiative is unsuccessful, San Jose is facing the prospect of laying off most of its workforce. If the worst-case scenario plays out (and again, most public pensions make rosy assumptions), Reed offers this description of how the country's 10th-largest city could look in 2016: "A volunteer fire department, a mostly volunteer police department, and not much else. All libraries except Martin Luther King would be closed. All community centers, most likely closed." While this might sound extreme, San Jose just laid off over 500 workers and demoted almost 100 others, while imposing a 10% pay cut, to close its most recent budget deficit. Meanwhile, the cities of Half Moon Bay, Sacramento and Costa Mesa just laid off dozens of employees, Compton may still do so, and other cities, including Oakland, Montebello, and Chowchilla, are flirting with outright insolvency. Still others (San Diego and San Francisco come to mind) have largely waved their hands at the structural weaknesses of their finances. Which is all to say that, as time goes by and the pension math becomes even more intractable, the situation playing out in San Jose might become much more common. You can ask yourself how much you want to pay the same heavy taxes to a government that offers little to nothing by way of services in return. And speaking of taxes . . .

3. Taxes will go up. It's not much of a prediction since, you know, Jerry Brown and Democratic lawmakers have already declared their intention to seek higher taxes via the ballot next year. We're fairly confident the voters will beat them back (they were never receptive to them this year, in spite of all the ink that was spilled supporting them), but keep in mind that the next election is likely to bring a Democratic supermajority in the Legislature. After that, we think all bets are off. Two votes in each house were the only reason why higher taxes weren't imposed by lawmaker fiat this year; without that hurdle, our guess is that new taxes will become the Legislature's first go-to option for meeting revenue shortfalls in the future. They might even go for the Holy Grail of pro-tax liberals in the state: reform of Prop 13, most likely in the form of the so-called "split roll," in which the law's protections for commercial property are removed.

4. Recession will become a permanent reality, and California will continue to hemorrhage population. What we've mentioned before might sound pretty bad, but it's important to remember that politics has a human cost. Higher taxes and reduced public services make it harder for average Californians to make much of a life for themselves here. More to the point, a Prop 13 split roll would cripple many employers in a state already struggling with 12% unemployment. That we're even discussing the split roll, of course, points to a more basic problem: while governments everywhere impede the proper functioning of free markets, California's seems uniquely committed to annihilating free enterprise within its borders altogether. The most recent example of this, of course, is the Amazon Tax, which shows us that Sacramento is willing to destroy thousands of California jobs in order to seize more private wealth. To say nothing of the chilling effect it's likely to have on web-based business development moving forward. But it's hardly the only example. In a year and a half, we'll be taking the Great Leap Forward into the California of AB 32, which is likely to strangle the state's economy in order to marginally reduce its emissions of greenhouse gases. Meanwhile, a slew of bills are moving through the Legislature that also stand to destroy jobs in the state, whether by workplace mandates, tax hikes, employee benefit mandates, regulations, and new liability costs. The point being that it's tough for private business to flourish under a government with this much contempt for the free market.

5. Debt downgrade and default will occur everywhere. Meanwhile, with local government finances coming under greater scrutiny (Illinois' Cook County, which includes Chicago, recently suffered a debt downgrade) and Meredith Whitney continuing to warn about widespread municipal default and bankruptcy, the ratings agencies are closely watching governments in California. S&P has released its analysis of California's newest budget, and it's not positive; according to analyst Gabriel Petek, "Unlike the governor’s original and revised budgets, this approach would not appear to make much improvement to the state’s fiscal structure, meaning there is a fairly predictable budget gap to deal with for next year already. I’m not aware that the budget package involves any reforms of the state’s pension plans, and it adds to the state’s deferrals for part of the solution." While noting that the rating agency will carefully watch the state's cash flows to see whether the $4 billion in new revenues materializes (and whether the cuts realize the projected savings), Petek said the budget "may allow the state to avert a liquidity shortfall of the kind we have seen in recent years by accommodating cash-flow borrowing. The key here will be in the details." In other words, California's outlook is unlikely to be bumped up from "negative," and its credit rating could still be subject to downgrade. Keep in mind, the cities of Modesto, Chowchilla, Montebello, and San Francisco have all had bonds downgraded recently, and the cities of Compton, Oakland, and San Jose are openly flirting with bankruptcy. This might sound like academic noodling, but a further deterioration of bond ratings could be catastrophic, as it would exacerbate the above problems: a debt downgrade means that borrowing becomes more costly, and a great deal of the operating cash flow of California's governments comes from short-term debt. And all of those costs are ultimately passed on to taxpayers.

It happens so often we can barely keep up, but another California city has voted to ban medical marijuana dispensaries within city limits. This time, it was the San Bernardino County town of Loma Linda, as the City Council voted Tuesday to approve a permanent ban that replaces a 2009 moratorium. The mayor of this largely Seventh Day Adventist community, Rhodes Rigsby, says the ban isn't about legislating morality, but about preventing misuse and "keeping the city clean." Rigsby, who is also a primary care physician, says of medical marijuana, "My concern is the overuse for questionable reasons like a sense of unease . . . That's just my belief as a physician." Which makes sense: after all, doesn't the government shut down Walgreens all the time when they find out someone's been abusing prescription drugs? As far as the argument that dispensaries are bad for neighborhoods, we're not sure why a ban is necessary since cities are allowed to shut problem businesses down by existing nuisance ordinances. Then again, if governments' actions had to make sense, how would they ever get anything done?

But that's not all that's going on that makes no sense. We also have a report from the town of Rialto on its plan to partially privatize its water supply. Our readers might recall that we touched on this plan a few weeks ago: a firm called the American Water Works Company had submitted a proposal to take over the city's wastewater management and supply water to residents of Rialto's central district. At the time, the discussion centered around the fact that residential water rates would nearly double under the company's plan. Left unsaid was that the current water rates have been kept artificially low by the city, which has managed that feat by putting off $40 million in infrastructure improvements; in other words, ratepayers are likely going to face steep hikes no matter who manages their water, and given the inefficiencies inherent in government management, they'd probably be better off with American Water. Not to mention that the city government would be receiving a $30 million payment up front from the company. So, naturally, the City Council killed the proposal Tuesday. Because residents were worried about their rates going up.

If you thought it was only the executive and legislative branches of California's government that were dedicated to destroying the state's economy, you'd be wrong. The California Supreme Court is also taking its hacks today, with news of a ruling in a labor law dispute. The LA Times is reporting that the court has ruled that out-of-state residents who work for California companies are protected by the state's overtime laws when they travel here for business. The suit was brought by out-of-state instructors who work for Oracle, who contended that they were entitled by California law to overtime pay after working eight hours in a day.

Labor lawyers expect hundreds of lawsuits to be filed against companies in the state, for a wide variety of labor law violations, as that employers will be forced to carefully track employees' locations. Business travel here will likely be discouraged. In the words of attorney Robert Span, who represented the defense in the case, "Previously most employers in California believed that a non-California resident was not subject to California employment laws, even if that person came into the state for a brief period of time. And if you extend California law in the overtime area, will you also be extending other California labor laws to employees who live out of state?"

While we and others were willing to credit Jerry Brown for standing against the United Farm Workers by vetoing Darrell Steinberg's "card check" bill, those on both sides comparing Brown to Wisconsin Governor Scott Walker may have been a little hasty. Apparently, the budget bill Brown just signed contains a very early Christmas present to the state's public school teachers.

Apparently, the budget's education trailer bill, AB 114, was introduced just minutes before lawmakers voted on the budget package Tuesday night, where it passed without discussion and was not made public until Wednesday. It prohibits K-12 schools from laying off teachers in the upcoming fiscal year, and requires administrators to ignore the possibility of "trigger" cuts if tax revenue fails to meet Sacramento's expectations during the year. In other words, if schools are hit by a $1.75 billion cut halfway through the year, they can't lay off teachers to make up the difference, and they're required to assume that the cuts won't happen in the planning they're doing now. Some districts may even be required to rescind pink slips they issued earlier this year. According to Rick Pratt, executive director of the California School Boards Association, "Obviously, legislators went out of their way to protect teachers from layoffs, notwithstanding the level of funding they're providing for schools."

But the season of giving doesn't stop there. Remember the California Teachers' Association's big push for tax extensions to be passed without voter approval, and the California Federation of Teachers' proposal for a "millionaire's tax"? Well, it looks like they'll be getting their money one way or the other: another provision of AB 114 requires the state to cough up $2.1 billion in additional money to schools if voters reject tax extensions or they don't get to a ballot this year. Yes, you read that correctly. What's more, the bill also suspends three-year oversight of school district budgets by counties; while removing the requirement that districts balance their budgets beyond one year won't fix the finances of troubled districts, it will ease the pressure on unions to negotiate concessions. As one superintendent puts it, "It makes it difficult to look them in the face and say we have a problem. It defers the money problem and makes it worse." Kern County education official Michael Hulsizer was more blunt: warning that many districts will declare bankruptcy a year from now, he called it "frightening to pull the plug on a warning system that works. The consequence will be to enable districts to make bad decisions."

In other words, please spare us any more rhetoric about Jerry Brown's courageous stand against organized labor.

If you thought the Stanford Prison Experiment was cruel, you aren't going to enjoy this report from the Sacramento Bee on what some real prison guards are up to. While the "guards" in the Stanford study illustrated how easily a legal monopoly on physical force can be abused, the California Correctional Peace Officers Association is showing us how easily taxpayers' wallets can be abused. Apparently, since 2005, the union has been refusing to compensate the state for pay and benefits some leaders received while off work doing CCPOA business. And in spite of repeated court losses over the issue, they're still fighting against paying back some $4.4 million that they were paid to not guard prisoners. This time, it's former CCPOA lawyer and Brown appointee Ron Yank who will be taking up the lawsuit against the union. Hopefully he can succeed where Schwarzenegger's attorneys failed. Otherwise, just add that money to the running tab of wasted spending that Sacramento needs to cut before talking about higher taxes.

After being signed into law yesterday, California's so-called Amazon Tax goes into force on Friday. As we've discussed before, the state's budget math for the coming fiscal year assumes that $200 million will be collected from Amazon, Overstock, and other online retailers, who will now be compelled to collect sales taxes on Californians' purchases. Yet the ink was barely dry on ABX1 28 before Amazon and others began to push back. Now, it's looking very likely that the tax will have the expected effect of driving businesses out of California, resulting in nowhere near $200 million being collected by the state.

First off, as we and others reported yesterday, Amazon has terminated its contracts with its 25,000 California affiliates; apparently, according to the San Jose Mercury News, Utah-based Overstock has done the same. Many of these affiliates, who paid a combined $152 million in state income taxes last year, will presumably either leave the state or go out of business. Also possibly on the chopping block are Cupertino-based Lab126 Inc., which develops Kindle e-readers, and Amazon's Studio City-based office, which houses its Internet Movie Database. Amazon also hinted that it might sue to overturn the law; in 1992, the Supreme Court ruled that states cannot tax businesses outside their borders, because interstate commerce is a federal matter, so they probably have a case to make. We would also note that this tax was passed without a two-thirds majority vote. But the loss of the affiliates, and the thousands of jobs they create, is exactly the kick in the stomach that California's economy doesn't need these days. You know the implications are grim when a member of the Board of Equalization is criticizing a tax hike, yet here we have George Runner blasting it: "Even as Governor Jerry Brown lifted his pen to sign this legislation, thousands of affiliates across California were losing their jobs. The so-called 'Amazon tax' is truly a lose-lose proposition for California. Not only won’t we see the promised revenues, we’ll actually lose income tax revenue as affiliates move to other states." Yep; that's pretty much where we're at.

We have good news to report. Sort of. Last week, an appeals court ruled that the California Air Resources Board could proceed with implementation of its cap and trade program after an environmental group's lawsuit forced it to revise its analysis of alternative carbon control schemes. At the time, it looked like we were back on track to see a fully implemented cap and trade scheme in January 2012. Well, it looks like the California economy just got a stay of execution: the program is being delayed for a year. The delay is apparently a result of the litigation: between losing three months after a San Francisco judge ordered a halt to implementation, and needing to finalize its analysis of cap-and-trade alternatives, CARB no longer thinks it can get a fully functioning cap-and-trade system online in six months.

Of course, the program is still on for 2013, and CARB isn't revising its emissions targets to account for the delay. So private industry is still facing the same persuasive argument against doing business in California. But the delay does highlight the fact that California's hopelessly inept bureaucracy and perpetually litigious environmental movement represent the last hope for economic good sense in this state. If it can happen with high speed rail, perhaps it can happen with cap and trade.

Wednesday, June 29, 2011

Well, that didn't take too long. As we noted yesterday, it appeared that the California Legislature and Governor Jerry Brown had waded into murky legal waters with some of the maneuvers they made to close the state's budget gap. Well, it turns out we weren't alone in thinking that. Capitol Weekly is reporting that the League of California Cities is planning to take a lawsuit straight to the state Supreme Court, possibly within days, over the "backfill" component of Brown's plan to abolish the state's 425 redevelopment agencies. Meanwhile, the AP reports that the Howard Jarvis Taxpayers Association may file a separate challenge to the new fees for vehicle licensing and rural homeownership. Together, the state is counting on these moves to generate over $2 billion in revenues next year.

The Legislature's plan to abolish the RDAs has two components: a bill that wipes the agencies out as of October 1, and a bill that allows individual RDAs to avoid dissolution by making payments to state-level special funds that support school, fire, and transit districts. Critics allege that the second set of provisions violates Prop 22, a voter-approved initiative preventing state agencies from raiding funds allocated to local government agencies. By their argument, it's unconstitutional for the state to seize property tax dollars in this way. Watchers of the RDA saga will note that the Legislative Counsel's office concluded, in an opinion back in May, that Brown's original plan to force the RDAs to reimburse the state for the costs of abolishing them was unconstitutional. We don't really have a dog in this fight, but it seems to us that the League has a pretty strong argument.

The legal challenge that may arise with respect to the fee hikes is based on Prop 26, which requires a two-thirds majority vote to pass tax and fee increases. The vehicle fee money will apparently go to the DMV, while the fire fee money will go to the California Department of Forestry and Fire Protection. According to state Sen. Mark Leno, the fact that they're paid for specific state services makes them okay by the law. Prop 26 is a little hazy on the types of fees it allows, but it does require the state to prove that its hikes aren't prohibited taxes. Our guess is that the fees would probably survive a court challenge, but they do seem to run head-on into the intent of the measure, which aimed to keep the government from disguising tax increases as fees. We'll wish the Jarvis folks luck, but note that they've got a hard road with this one.

Back in May, an appeals court ruled that Sacramento County's employee pension system was obligated, by the state's Public Records Act, to divulge the names and pension packages of retirees to journalists. At the time, we noted that this could have implications for other California counties who operated their own retirement plans outside of CalPERS. Ventura County, for one, chose to abandon its resistance to a local paper's request for its pension data. And yesterday, the forces of accountable and transparent government claimed another victim, as San Diego County's Employee Retirement Association was ordered by an appeals court to turn over data on its pensions to the activist group Californians for Fiscal Responsibility. Specifically, the court rejected the county's argument that state laws prohibited them from releasing individual records, as well as its argument that disclosures could subject retirees to "criminal mischief, such as identity theft, elder abuse or home invasion by criminals who would target them based on the publicized size of their pension." We're sure that this will pale in comparison to the criminal mischief of the pension packages that County taxpayers are going to be learning about.

They say breaking up is hard to do. For governments used to hiring and paying unionized workers with taxpayers' money, it's apparently even harder, as these two stories out of Sacramento and Compton show.

We've been writing about the financial troubles of Compton for a little while: when we last left them, the City Council was trying to close a multi-million-dollar budget gap without any remaining reserves, and was contemplating a plan to lay off half the city's workforce and cut 80 vacant positions for a savings of $4 million. Well, the LA Times is reporting that the city has rejected that plan, and will now enter the new fiscal year without a budget. Their reason: the city's unions came through with an alternate proposal yesterday that would save about $3.6 million by offering workers incentives for early retirement. So, never mind that Compton is insolvent: holding up a plan to balance the budget and violating the city charter is worth it if it saves union jobs.

Meanwhile, this report shows us a similar situation playing out in Sacramento. Just as we're seeing in San Jose, dozens of police officers are turning in their badges this week as a consequence of the city's budget crisis. Dozens of other employees, including crime scene investigators, community service officers, and administrative staffers are also losing their jobs. And with just days left in the fiscal year, Mayor Kevin Johnson is pleading with the cops union to negotiate concessions to prevent 42 more officer layoffs. At issue? Sacramento wants its police officers to start contributing to their pensions, and not only is the union unwilling to have those discussions, it's unwilling to negotiate any compromise that averts all layoffs. As union boss Brent Meyer put it, "We're interested in meaningful discussions, but we want to save everybody." Good luck with that.

In our wrap-up of the newly passed California budget, we noted that the $200 million the state was counting on from its "Amazon tax" on online retailers might not materialize if companies like Amazon and Overstock chose to terminate their contracts with California affiliates rather than pay up. We speculated that this could happen because, you know, both of the above companies had repeatedly threatened to do so. Well, roughly an hour ago, we saw a message on Twitter noting that Amazon was already notifying its affiliates of cancelled contracts. This is apparently no joke: both Katy Grimes at Cal Watchdog and Tim Cavanaugh at Reason have gotten hold of the memo Amazon is sending out. It reads as follows:

Hello,

For well over a decade, the Amazon Associates Program has worked with thousands of California residents. Unfortunately, a potential new law that may be signed by Governor Brown compels us to terminate this program for California-based participants. It specifically imposes the collection of taxes from consumers on sales by online retailers – including but not limited to those referred by California-based marketing affiliates like you — even if those retailers have no physical presence in the state.

We oppose this bill because it is unconstitutional and counterproductive. It is supported by big-box retailers, most of which are based outside California, that seek to harm the affiliate advertising programs of their competitors. Similar legislation in other states has led to job and income losses, and little, if any, new tax revenue. We deeply regret that we must take this action.

As a result, we will terminate contracts with all California residents that are participants in the Amazon Associates Program as of the date (if any) that the California law becomes effective. We will send a follow-up notice to you confirming the termination date if the California law is enacted. In the event that the California law does not become effective before September 30, 2011, we withdraw this notice. As of the termination date, California residents will no longer receive advertising fees for sales referred to Amazon.com, Endless.com, MYHABIT.COM or SmallParts.com. Please be assured that all qualifying advertising fees earned on or before the termination date will be processed and paid in full in accordance with the regular payment schedule.

You are receiving this email because our records indicate that you are a resident of California. If you are not currently a resident of California, or if you are relocating to another state in the near future, you can manage the details of your Associates account here. And if you relocate to another state in the near future please contact us for reinstatement into the Amazon Associates Program.

To avoid confusion, we would like to clarify that this development will only impact our ability to offer the Associates Program to California residents and will not affect their ability to purchase from Amazon.com, Endless.com, MYHABIT.COM or SmallParts.com.

We have enjoyed working with you and other California-based participants in the Amazon Associates Program and, if this situation is rectified, would very much welcome the opportunity to re-open our Associates Program to California residents. We are also working on alternative ways to help California residents monetize their websites and we will be sure to contact you when these become available.

Regards,

The Amazon Associates Team

It remains to be seen whether the Amazon tax will face any legal challenge. (This, presumably, is the reason for the first three sentences in the third paragraph.) But it's still another reminder of Sacramento's contempt for private enterprise.

We were very intrigued by this article in the San Jose Mercury News: even as firms like Google and Facebook face greater scrutiny for using customers' personal data to target advertising and other services, a new generation of technology startups, many of them in Silicon Valley, is working towards a new business model that may give privacy advocates reason to cheer.

These new companies predict the emergence of a so-called "privacy and reputation economy," in which a number of online firms provide services related to individuals' online data: some would allow users to find out what information exists about them online, some would make it easier to counter false data, and some could even allow users to profit by selling limited access to their information. A Silicon Valley tech incubator called the Personal Data Ecosystem Consortium is working to bring these firms to life, and examples of the privacy economy are already sprouting up. Redwood City-based Reputation.com offers customers a report on their online reputations, along with free and paid services that help them shape that information. Personal, a startup based in Washington, DC but financed by venture capital money from Sand Hill Road, will allow people the chance to make money off of their personal information, essentially by allowing them to volunteer for targeted advertising. San Francisco-based Singly, meanwhile, will allow users to aggregate their online information in digital "lockers," enabling them to create highly personalized phone apps. Even web giant Google is getting in on the act with a recently-launched service called "Me on the Web," which allows people to use the company's search capabilities to monitor the information that's posted about them online.

While none of these ventures is guaranteed to last, we're nonetheless cautiously pleased that technology entrepreneurs are starting to respond to the troubling privacy issues associated with Internet use. Too many Internet firms, particularly in Silicon Valley (we're looking at you, Facebook), have cast a blind eye toward the legitimate privacy demands of their customers. As Personal CEO Shane Green put it, ""The closer I got to Silicon Valley, the less people understood what I was talking about. Things that might take 60 seconds to explain to someone in Michigan or Florida or D.C., after an hour people were looking at me and saying, 'I just don't understand your business.'" And, "I had so many people out there tell me that privacy is dead." Here's hoping that that's starting to change.

We give Jerry Brown a lot of flak for being too cozy with organized labor in the state (most recently by scuttling spending and pension reforms in the just-passed state budget), so we feel obligated to give him credit for taking an important stand against them. The LA Times reports that Brown has vetoed SB 104, a UFW effort that aimed to allow agricultural workers to unionize without a secret ballot.

As we discussed back in May when the Legislature approved the bill, the problem with "card check" is that allowing unions to form by circulating a petition makes it easier for pro-union workers to intimidate others. And of course, unionization would almost certainly raise the costs of doing business for the state's farms. In vetoing the bill, Brown said he wasn't "convinced that the far reaching proposals of this bill - which alter in a significant way the guiding assumptions of the ALRA - are justified. Before restructuring California's carefully crafted agricultural labor law, it is only right that the legislature consider legal provisions that more faithfully track its original framework."

Unsurprisingly, the UFW and other unions were livid with Brown when they heard the news. And of course, it's yet another slap in the face to Senate President Darrell Steinberg, the bill's author. But given the struggles in the state's farming regions, it's unquestionably the right thing to do.

Tuesday, June 28, 2011

Back in May, we noted the stranger-than-fiction story about the medical-marijuana aspirations of the tiny Delta town of Isleton. After years of financial mismanagement and corrupt dealings that led a grand jury to recommend disincorporation back in 2008, and the loss of the town's signature attraction, the Crawdad Festival, Isleton had pinned its hopes of an economic recovery to a large marijuana farm being run by the nephew of jazz legend Dave Brubeck. The town had hoped to bring in annual revenues of $850,000 from the farm, but was stymied by investigations by the federal Department of Justice and a Sacramento County grand jury. Yesterday, that grand jury released its findings, and medical marijuana advocates aren't going to be happy.

According to the San Francisco Chronicle, Isleton's journey into the world of medical marijuana regulations has taken a Kafkaesque turn. The planned farm would have been primarily devoted to research activities, with its marijuana being distributed at Southern California dispensaries through a non-profit, cooperative arrangement. Now, distribution of medical marijuana through non-profit collectives is supposed to be legal in California via Prop 215/SB 420, but the concept's definition in the law is hazy at best. Federal law, of course, prohibits pot cultivation for any reason. Apparently, the grand jury has decided that federal law trumps state law. In a scathing report, the grand jury ripped Isleton for pushing "a project that is perched on the blurry edge of marijuana law . . . not because of any desire to test the limits of the law, but because of the promise of money and jobs." We can see where they're coming from: when will all these awful California towns let go of their obsession with money and jobs? But more to the point (and leaving aside the obvious nonsense of expecting the market to be adequately supplied by socialist mechanisms): how the f**k is anyone in California supposed to grow our allegedly legal medical marijuana if a government-sanctioned collective can't do so?

With the end of the fiscal year fast approaching, we're learning more and more about the various ways that California cities are balancing their budgets. Just as we found earlier this month when we looked at some budgeting maneuvers in San Diego and San Jose, local governments are resorting to the tried-and-true methods we've come to expect.

In the city of Glendale, the LA Times reports that we're seeing a timeless California government classic in action: meaningless symbolic gestures. Much like the San Jose City Council's choice to shave less than one-tenth of one percent off of their budget deficit by taking a pay cut, the city managers and department chiefs in Glendale have agreed to pay more toward their health care benefits and retirements. The total savings in next year's general fund budget will be about $380,000. Which is great, except that Glendale needs to come up with $18 million.

Meanwhile, further north, it looks like San Mateo County and more than a dozen of its cities have been employing another favorite: kicking the can down the road. According to a report issued by a civil grand jury, these governments have largely weathered the economic recession by drawing down their reserves; in most cases, reserve funds account for 5%-15% of general fund budgets. The cities of Brisbane and Redwood City topped the charts by draining half of their reserves since 2007, while the city and county of San Mateo and the cities of South San Francisco, Woodside, Burlingame, and Menlo Park have drawn down over a quarter of their reserves in the same period of time. In fairness, none of these cities are scraping the bottom of the reserves barrel, but the choice to raid reserves in lieu of spending cuts suggests that these governments believe their funding problems are a temporary effect of the recession. Given that this is the California economy we're talking about, that might not be a safe assumption.

And finally, the Orange County town of Newport Beach is treating us to one more time-tested maneuver: bowing to public pressure. In a story that we first noted in early April, and one that brought Newport some unwelcome national attention, city lifeguards there get the same generous "3-50" pensions afforded to cops and firefighters. As a result, some Newport lifeguards are able to retire at 50 and collect six-figure pensions on the taxpayer's dime. Well, the LA Times is reporting that those pensions will be one of the casualties of the city's thin budget: rather than absorb layoffs, the lifeguards' union has agreed to a deal whereby all present and future employees will contribute substantially more toward their pensions, and new hires will see much smaller retirement packages.

If there's a single rule that defines politics in Los Angeles, it would have to be "no good deed goes unpunished." The tale of LAFD Chief Millage Peaks is just the latest example. This year (only his second as chief), Peaks was given the thankless task of imposing $50 million in cuts to the department's budget by Mayor Antonio Villaraigosa. He responded with the best plan possible given the circumstances: shutting down the fire trucks and ambulances at about one-fourth of the city's fire stations. The firefighters' union, of course, howled in protest at the cuts, even as the City Council approved them last month. Unfortunately, only one thing happens in LA when you upset the unions: yesterday, Peaks was shown the door, resigning from the department after 35 years there.

The smoke is starting to clear in Sacramento with yesterday's news that Jerry Brown and the majority Democrats in the Legislature have reached agreement on a plan to close California's remaining budget deficit for the coming fiscal year. With Brown expected to quickly sign it and Controller John Chiang not expected to object to its, ahem, assumptions, what's next for California and its government, and what have we learned?

1. That even in California, good things still happen sometimes. The upside to the Democrats' budget is that Brown's plan to extend income, sales, and use taxes for another five years is well and truly dead. That's right: just in time for the weekend, Californians will see their sales tax drop by 1%! Moreover, it finally means that we can stop writing about this awful idea, which never stood a chance with the voters and is precisely the wrong direction for the state's economy. Also looking very dead this morning are the state's 425 redevelopment agencies, which are slated to get the axe in this plan. We will not shed a tear for the corrupt local governments and crony businessmen who will have to find other ways of wasting taxpayer money after October 1.

2. That we're all going to have to pretend that the emperor has clothes. Lost in the litany of news reports breaking down the deal's particulars or discussing the marginalization of the GOP is a very uncomfortable truth: in many ways, this budget is just as problematic and certainly just as unbalanced as the budget Brown vetoed eleven days ago. The item getting the most attention is the new budget's assumption that $4 billion in extra tax revenues is going to magically appear this year. This might or might not happen, of course: the drop in tax rates will likely have some stimulative effect on the state's economy, but all of the near-term economic forecasts point to stagnation. To get around this laughably irresponsible method of fixing the budget, the new plan contains "triggers" that would cut spending on schools and welfare services in the middle of the year. But, the triggers would only cut $2.5 billion from these programs; so, by our count, the budget still relies on $1.5 billion in imaginary money. Moreover, if you're a school or a social service agency receiving these funds, how on earth do you plan your budgets knowing that a chunk of your funding could get clawed back mid-year? Moreover, the new budget still relies on $200 million being collected via the Amazon tax; a more likely scenario involves the state losing hundreds of millions in tax dollars as the company ends business within its 20,000 California affiliates. But the biggest elephant in the room is that $2.15 billion of the current budget's revenues might not stand up to legal challenges. The backfill of $1.7 billion from the RDAs is almost certainly illegal under Prop 22, and neither the $12 vehicle license fee hike nor the CALFire surcharge on homeowners' policies will be legal if the budget passes on a simple (i.e., not two-thirds) majority. But to judge by the morning news, we're all going to just pretend these things aren't problems.

3. That the big winner is still the status quo. Despite all of Brown's rhetoric about reform and responsibility this year, it's hard to look at this budget and not see "business as usual" written all over it. Did we pass a budget that used one-time gimmicks to put off tough choices? Yep: almost $3 billion of the money used to fix this budget comes from a one-year deferral of payments to schools and community colleges. Was organized labor quietly able to kill urgently needed reforms? Yep: by cutting Republicans out of the negotiations, Brown dropped all discussion of pension reforms, a spending cap, and an easing of business regulations. Are we still moving in the direction of bigger government and higher taxes? You bet: with Brown planning soaring increases in state spending, including a $12 billion increase next year, he and the Democrats are already talking about a tax initiative for next year's ballot. So what did we learn this year? Absolutely nothing.

Monday, June 27, 2011

If you follow the finances of the city of Sacramento, you might think that they'd be trying to save money. After all, they've got less than $1 million in the bank and they're trying to figure out a spending shortfall that's somewhere between $39 million and $60 million, and the city's police and fire departments have just made sharp cuts. As such, you could be forgiven for thinking that Sacramento has a problem managing taxpayer money. Fortunately, Katy Grimes at Cal Watchdog is here with an example of how bad the city is with that money.

Of course, up and down the state of California, cities such as Costa Mesa and San Jose are saving money by contracting formerly public services out to private businesses. And when a city pays certain workers $60,000 salaries, benefits, and pensions to do work that we did as a kid for $10 an hour, one might argue that contracting out for that work could help a town trying to come up with $60 million. Fortunately, Sacramento has just such a set of employees: the lawnmowers who maintain the city's parks. Fortunately for the state capital, even as its parks department has cut nearly half of its employees in the past two years, it appears to have a private firm waiting in the wings. For the past ten years, a company called Morton Golf has managed the William Land Park Golf Course, the city's oldest course. It has done this so effectively that the city government recently signed an agreement to have Morton provide grounds management and other services at the city's other golf courses. Yet the talk of privatizing Sacramento's park services has prompted exactly the sort of action from organized labor that you'd expect: as soon as the contract was signed, Morton was prompty sued by four former city golf employees alleging sexual harassment and other violations of labor law. Given that Morton had recently taken up maintenance of other parts of William Land Park as a courtesy, this probably isn't a coincidence. Sacramento, of course, has chosen to put off its plan to privatize city parks, and instead will explore the change in an audit of the parks department. No word yet on how long that audit might take.

We noticed a short item in the Sacramento Bee today on the lack of engagement many Californians have with their political system: according to a new Field Poll, 25% of Californians say they rarely follow the news, an increase since 1999. Asian American and Latino residents, as well as those 18 to 29, were particularly likely to express this view. This made us think of the "deliberative polling" experiment that occurred last weekend in the Los Angeles County town of Torrance. The "What's Next, California?" effort, the brainchild of Stanford professor Jim Fishkin, brought together 300 randomly selected California voters for two days of expert panel lectures, breakout sessions, and polling regarding taxation, local government control, representation in Sacramento, and the initiative process.

The event was supplemented by discussions on Twitter, in which yours truly got involved when a participant replied to one of our Tweets to someone else. (We hope we got our point about fiscal centralization across properly.) Over at Reason Hit & Run, Tim Cavanaugh has his own rundown of some of the more priceless Twitteration. According to some of the participants, we have to pay high taxes for our great weather, Prop 13 is an obstacle to raising revenue, "economic inequity correlates to economic underperformance," and references to Nazis and California's north-south divide are a turnoff. When the Commonwealth Club releases the results of the poll this week, we're sure the findings will be interesting. As Cavanaugh points out, of course, the deliberative polling exercise has a big flaw that Californians attempting to follow politics will be quite familiar with: it assumes that the solution to the state's political problems involves academic and policy experts explaining the important issues and the proper way to think about them. We noticed the same argument in the depressingly elitist Economist feature on democracy in California back in April. Yet we have the most educated Legislature in the country, and we couldn't have asked for a Governor with more experience or more knowledge of the intricacies of the state's politics. Clearly, we've done our job in electing the brightest, most capable people available for the job. And if you read this blog, you know that those folks are doing everything they can to pass the new taxes and regulations that the intelligenstia believe will usher in our state's next golden age. So what exactly do voters need to be educated into doing differently?

Part of why the average Californian is disconnected from the state's politics is that the system is so arcane. As we finish up our fourth month of doing this blog, we still learn new things about the layers of bureaucracy and regulation that determine the way our government works. And we spend, you know, a lot of time reading about California politics. But a much bigger part of it is, perhaps unintentionally, something that many of the deliberative poll participants complained about: Prop 13. Not because it stemmed the tide of money being transferred to the government from the people who had earned it, but because it made local government irrelevant by centralizing tax dollars in Sacramento. As a result, Sacramento is the only place where meaningful political action takes place, and the activities of focused, moneyed lobbying interests (whether for business, environmental causes, organized labor, or something else) trump constituents every time. And there exists no organized force in the state with an interest in changing this status quo. So, eligible voters in California who pay no attention to its politics are at least somewhat acting out of rational self-interest: in a political system where your input is essentially meaningless, you're probably going to find better things to do with your time.

The Sacramento Bee reports that Jerry Brown is finalizing a new budget plan with Democratic lawmakers that could hit the floor of the Legislature as soon as tomorrow. Though presumably they'd be able to push it through on a majority vote as they did with the budget Brown vetoed just over a week ago, it's likely a solution that will leave the Dems fuming.

According to the Bee's Jim Sanders, the new plan suggests that Brown has, at long last, abandoned his plan for five more years of tax increases, and is trying to strike a deal for another majority-vote budget. Apparently, the new plan essentially replaces the legally questionable maneuvers from the last budget with . . . nothing. Lawmakers are going to assume that $4 billion more in tax revenues are on their way, and if they aren't, a mid-year provision will trigger cuts to education and other programs to make up the difference. If the report is accurate, California will be getting the Democratic Party's version of an all-cuts budget.

So what would this mean? Well, the new budget would most likely pass muster with Controller John Chiang, so lawmakers would get their salaries back. But more importantly, it would be a victory for the state's taxpayers, who will see income, sales, and use taxes fall by 1%, in addition to a decline in vehicle license fees. That's right: lower sales taxes just in time for the weekend! It says a lot about how overtaxed Californians are when such a moment is even cheered by someone from the Board of Equalization.

(UPDATE at 4:20pm: The plan is official, having been announced at a joint press conference involving Brown and Dem lawmakers this afternoon. Also of note, John Chiang says he will not weigh in on this budget if Brown signs it.)

(Also, assuming this passes, we will have to tip our cap to the crystal ball of Tim Cavanaugh.)

(UPDATE at 9:47pm: Hmm. Reading a more detailed breakdown, we're not sure this plan will work either. It retains three items from the last budget whose legality is questionable: clawing back $1.7 billion from redevelopment agencies, raising fees on homeowners who live in fireprone areas, and hiking vehicle license fees. On one hand, we're happy to cheer the death of the RDAs once again, but we're not sure the backfilling of state revenues will go through. The Amazon tax is also alive and well in the new proposal, despite the fact that California almost certainly won't collect $200 million in sales taxes from companies like Amazon and Overstock.)

Most of the talk in California politics these days concerns the efforts of Jerry Brown and Sacramento lawmakers to produce a balanced budget by this Friday, and all the events that have surrounded it. So, you could be forgiven for having forgotten about an unfunded public pension liability that's been estimated at a half-trillion dollars, and which neither the Governor nor the majority Democrats seem at all interested in addressing. Fortunately, a pair of stories today suggest that the issue may be coming back to the forefront.

First off, Ed Mendel's Calpensions blog reports on the efforts of CalPERS to avoid coming to terms with the size of its pension debt. Aside from failing to produce reports required by SB 867 when resetting employer contribution rates, CalPERS is also lobbying heavily, along with CalSTRS, against HR 567, a Federal bill that would require them to report estimated debt using an earnings forecast based on risk-free assumptions (i.e., the expected earnings of a portfolio consisting of Treasury bonds). As we've pointed out before, large public pensions like CalPERS typically take advantage of federal accounting rules to overstate the value of assets, understate liabilities, and spread out pension payments over great lengths of time - all practices that would land the managers of a private fund in prison. The above reforms are meant to address skepticism of the rates of return that many public pensions assume in calculating their liabilities; if funds like CalPERS assumed returns similar to those of private funds (e.g., 5%-6%) rather than returns in the neighborhood of 7.5%-8%, clearly their liabilities would look worse. What's not discussed here is that prolonged periods of low interest rates have caused many pension funds to shift into riskier assets in order to generate the returns needed to pay out benefits. Yet because public funds like CalPERS are allowed to smooth in losses over periods as long as 15 years, most have not accounted for the heavy market losses in 2008 and 2009. Of course, funds like CalPERS have a very good reason for resisting a more realistic look at their holdings and liabilities: if they were held to the same standards as private retirement plans, the required payments would likely triple, quickly bankrupting governments at all levels in the state.

Meanwhile, down in San Diego, tensions are already simmering over a pension reform proposal that advocates are trying to put on a citywide ballot in June 2012. By capping salaries for current city employees and switching all new hires (except cops) to a 401(k)-style defined-contribution pension plan, the proposal would likely save San Diego's future finances by phasing out its defined-benefit plan. Yet organized labor is not giving up defined benefits without a fight, and conflicts have erupted between labor and business advocates outside stores where the initiative's supporters are attempting to get the 94,346 signatures required to make the ballot. A private investigator hired by a local business group has produced video showing several sign-wielding union supporters surrounding a signature-gatherer; another video shows two men claiming to be firefighters repeatedly interrupting a signature worker trying to explain the petition to others. Moreover, a recent letter on the initiative from the San Diego-Imperial Counties Labor Council warns union members that police pensions will be curtailed by the plan, which is false. While the Council's leader, Lorena Gonzalez, says the unions' "goal is just to educate people because there is no official way ... to ensure that people understand what they’re signing," spreading misinformation and attempting to silence opponents seems like an odd way to educate people. Though, of course, if you're committed to the idea that San Diego will have no problems paying its future pension obligations, then it probably makes sense to do what you can to make sure the other side doesn't get a chance to be heard.

Major League Baseball is abuzz this morning with the report that the Los Angeles Dodgers have filed for bankruptcy. Apparently, owner Frank McCourt has secured $150 million in interim financing, and hopes to use the protection of bankruptcy proceedings to secure a TV rights deal that would allow him to fully pay off all the team's creditors.

Many following this sorry turn of events point to the divorce proceedings between McCourt and his wife Jamie as the trigger for the team's downfall; until the divorce (which was announced in 2009) is finalized, it's unclear who owns the franchise. In truth, however, the problems began the day MLB commissioner Bud Selig and the other team owners approved the sale of the Dodgers to McCourt in January 2004. Put simply, FOX NewsCorp was desperate to sell the team, and its status as baseball's national TV rights holder meant that Selig was willing to do the company a favor, even though McCourt's purchase was primarily debt-based. Of course, anyone willing to buy a baseball team for $430 million despite having no money is probably going to make other bad decisions. Lest we forget, the McCourt-era Dodgers agreed to pay J.D. Drew, Derek Lowe, and Andruw Jones a total exceeding $127 million. Even now, players are the team's largest creditors; Manny Ramirez is owed $21 million, despite not having played in LA for two seasons; Jones is owed $11 million, despite hitting .158 in 75 total games for LA back in 2008; oft-injured current Dodgers Hiroki Kuroda and Rafael Furcal are owed $4.5 million and $3.7 million, respectively; the Chicago White Sox are owed $3.5 million of Juan Pierre's salary; and prospect Zach Lee is owed $3.4 million. In addition, McCourt raised ticket and concession prices every year despite promising not to, and failed to respond to the growing problem of unruly fans with greater security; the latter problem, of course, became impossible to ignore after the savage beating of Giants fan Brian Stow on Opening Day this year.

From a fan's perspective, it's tough to feel sympathy for any of the parties involved in the bankruptcy, and unsurprisingly, attendance at Dodger Stadium has been in free fall this season. We don't like the idea of seizing the team from McCourt, no matter how incompetent his regime has been. Still, given Selig's rejection last week of a television deal that would've brought the McCourts' divorce to a close, it's looking increasingly likely that the team will end up in the hands of MLB until another buyer can be found. Whether the team turns around at that point will depend on whether the owners can avoid repeating the same disastrous choice they made with McCourt.

We'd expected this day would come, but Reuters is reporting that the cap and trade component of California's global warming bill, AB 32, is back on track. Back in March, you may recall that a San Francisco judge ordered a halt to AB 32's implementation, in response to an environmental group's claim that it had failed to consider more draconian alternatives to cap and trade. In response, the state's Air Resources Board revised its analysis, and on Friday, the First District Court of Appeal ruled that the board could resume implementation.

Given the numbers of jobs and firms already fleeing the Golden State, AB 32 seems to be exactly the baseball bat to the kneecaps that its economy needs. As we pointed out when the revised CARB analysis was released, the dramatic drop in anticipated greenhouse gas levels associated with the ongoing recession provides a grim clue as to what cap and trade will bring. In other words, if you've enjoyed the collapse of the real estate market and the construction industry, as well as 12% unemployment, expect California under AB 32 to look pretty similar.

Sunday, June 26, 2011

As the Orange County Registerreminds us today, a new study in the Loyola of Los Angeles Law Review has shone a harsh spotlight on California's capital punishment system. While conservatives may argue that death row serves as a deterrent to serious crime, it's a lot harder to justify spending $184 million a year on it, given our state's grim finances.

As this LA Timeswrite-up explains, the costs associated with the 714 Californians on death row arise largely from three decades' worth of voter initiatives that have created 39 new circumstances in which the death penalty applies, along with the exhaustive appeals process that the law guarantees condemned prisoners. As a result, the average lag between conviction and execution had grown to more than 17 years by 2006; now, with legal challenges to the state's lethal-injection methods, that average has stretched to 25 years. As such, the costs of prosecuting death-penalty cases are vastly higher than life-without-parole cases. In addition, the heightened security required by law on death row costs California taxpayers $72 million a year. The study offers three paths by which voters might arrest the system's out-of-control costs and infrequent executions: approve about $85 million more in funding for courts and attorneys, so as to shorten the appeals process; reduce the number of crimes that are eligible for the death penalty, for a savings of $55 million annually; or abolish capital punishment entirely and saving about $1 billion every five or six years.

We would, of course, prefer the third option. But not because of the financial implications. As you might have gathered from our comments here, we have a hard time brooking arguments in favor of government force. As weak as the deterrence arguments are, they're really beside the point: defending the death penalty boils down to defending the government's right to murder human beings, which is another way of refusing to offer those human beings the courtesy of considering their guilt or innocence. Because there's a contradiction in defending an action and simultaneously refusing to argue that action's merits, which is all that force is. If it's impossible for the ends to justify the means, then it's impossible to justify killing someone in order to discourage someone else from doing whatever heinous thing the condemned may have done. Put simply, this is not a practice that civilized people engage in.

Today is a red-letter day for journalism on the economic gulf between Texas and California, specifically on how those country-music-loving, born-again Christian, steak-eating, philistine suburbanites seem to be leaps and bounds ahead of us sophisticated, socially-conscious, environment-friendly intellectuals. Exhibit A is this column from the Sacramento Bee's Dan Walters. Noting the contrast between the Lone Star State's robust job growth and low unemployment and our state's continued stagnation, Walters underlines California's struggles: $600 million in unemployment benefit payments every month (out of a fund that's $11 billion in the red), cuts to public education, social services, health care, and public safety, and millions of jobless residents struggling to keep roofs over their heads and food on their tables. Yet according to the Dallas Fed, the economy in Texas is going strong and getting stronger.

Picking up on the same theme, Brian Calle wonders in the Orange County Register whether Texas is becoming the new California. Pointing to both its growing political clout and its booming economy and low cost of living, Calle sees echoes of the Golden State of yesteryear in the Texas of today. While the Lone Star State is becoming the economic engine of America (largely at our expense), it's also fair to point out that it's adopting one of our more recent habits as well: gimmicky public finance. In order to close a two-year budget deficit of $27 billion, Texas modified its education funding law to put off a $2.3 billion payment next year, and assumed that demand for schools and Medicaid services would remain flat. Still, the contrast between the budgeting processes in the two states couldn't be more clear. Texas took a $21 billion hatchet to its spending, and managed to make the math work without raising taxes or raiding the state's $9.4 billion Rainy Day fund. Of course, in a state with a fundamentally robust economy, it made sense to view the shortfall as a temporary effect of the 2007-09 recession; many of those service cuts could prove to be short-lived. In California, on the other hand, the state's sick economy and hostility to private enterprise, as well as its perpetual budget shortfalls, suggest that any spending cuts will need to be permanent. Yet our approach to closing a one-year, $25.4 billion hole has been a mess: $11 billion in cuts that the state's Democrats have moved heaven and earth to reverse; an unwillingness to make fundamental reforms on issues like pensions; a myriad of tax proposals in the midst of recession; an abortive budget filled with possibly illegal gimmicks; and, lest we forget, a planned $12 billion spending increase next year.

But Texas isn't the only place making life hard for the California economy. Dan Morain at the Sacramento Bee brings us the latest on Silicon Valley green-tech company Bloom Energy. Back in April, we wrote about Bloom's dominance of the state's Self-Generation Incentive Program. Operating what appears to be a lobbying firm that also makes fuel cells, the company has received over $200 million in subsidies from California taxpayers through SGIP. While the state continues to argue that such subsidies will ultimately pay off in the form of new jobs, Bloom Energy has decided to pay California back for its investment by moving the manufacture of its fuel cells to Delaware. In other words, while the company will be keeping its Sunnyvale headquarters, they essentially lobbied California to help them grow their business in Delaware.

Thomas Peele at the Contra Costa Times has a report on the status of the Bay Area News Group's effort to compile a comprehensive database of the salaries, pensions, and other benefits of public employees in California. In short, after three years of Public Records requests, the progress has been minimal, even in the Bay Area.

If you knew nothing about California government, you could be forgiven for assuming that assembling that database would be a straightforward question of data entry. After all, the California Public Records Act is pretty clear: government agencies are required to take the most expansive view possible of public disclosure, and must release information quickly. As such, you wouldn't think that Peele and his colleagues would be having much trouble obtaining the information they're after. Of course, if you're a regular reader of this blog, you know that the city of Burbank continues to fight disclosure of the bonuses it guarantees its workers, and that many California counties have resisted revealing the details of employee pensions.

As such, you probably won't be surprised to know that the city of Oakland, as well as the Oakland Unified School District, have only supplied partial (and unusable) information, and have ignored Peele's follow-up requests for months. Nor are you likely to blink at Calaveras County Supervisor Darren Spellman's assertion that the county has no public records, or his response to Peele's request for clarification: "Maybe you could at the very least confirm your credentials by identifying yourself and sharing pertinent information about yourself such as what university you graduated from, before becoming the purported journalistic professional you wish for us to believe you are." You might not even be surprised to learn that Jay Huyssoon, the chief of Solano County's Cordelia Fire Protection District, gave this response to a request for the names and salaries of the district's employees:

"I have never heard of your organization nor am I familiar with any law that states I must give sensitive information to a group (of) individuals who may be terrorist in nature or scam artists. I have received official looking letters from the FBI and the Office of the President of the United States. These turned out to be false. If you wish to come to this office, with credentials that will pass the scrutiny of a retired police officer working here, and ask your questions, that is fine by me."

That's right: in California, the law requires public officials to disclose records, even in response to anonymous requests. Unless they come from inadequately credentialed journalists, terrorists, or scam artists. We were unaware that keeping public employees' salaries secret was so important in holding al Qaeda at bay.

Ever since Wisconsin Governor Scott Walker began his push to roll back the bargaining rights of public workers, Americans have been treated to the spectacle of angry unionized teachers decrying cuts to public schools. In March, after Jerry Brown and California's Legislature agreed to billions in cuts that fell heavily on the Cal State and UC systems, these protests came to California. The predictable wave of propaganda that followed even led many struggling Bay Area homeowners to the dubious choice of imposing higher taxes on themselves. Well, today we noticed a pair of stories that might make California taxpayers just a little more reluctant to blindly toss money at public schools in the future.

First, Daniel Borenstein at the Contra Costa Times has some unfortunate news for taxpayers in the pleasant town of Pleasanton: they're going to be paying $9.3 million more in property taxes in the coming years, even though they never approved any additional school spending. According to an independent auditor, in 2003-05, the Pleasanton Unified School District refinanced the remainder of $155 million in voter-approved bonds that were due to be paid by 2025; though the refinancing reduced the debt-service costs of the bonds by almost $10 million, the accelerated payment schedule meant that property tax payments soared beginning in 2005-06. At the same time, the district took on an additional $6.8 million in new debt for construction, debt that voters had not approved. Though this latter debt was deemed unconstitutional by then-Attorney General Jerry Brown in 2009, and the district has no idea what happened to the money, the taxpayers will still end up paying the tab. (Property owners in the Sweetwater Union district, no doubt, will sympathize.) The moral of the story, then, is that stealing millions of other people's money means never having to say you're sorry. If you're a public school official in California.

Second, the next time you hear teachers bemoaning cuts to public schools, try to keep in mind that an ever-increasing share of your tax dollars are going toward ensuring that public-ed bureaucrats have a very pleasant retirement. According to this depressing report from the Sacramento Bee, the number of school administrators retiring into six-figure pensions has skyrocketed since 2005. Specifically, the Bee's review of CalSTRS data found that the number of school officials receiving pensions over $100,000 jumped from 700 in 2005 to 5,400 in 2011. Which isn't all that surprising, if you consider that administrators earn, on average, $168,000 a year, a 56% increase since 2001, and have seen their retirement benefits sweetened in that time. We'll add that these people do no classroom instruction. Of course, CalSTRS has a massive unfunded liability, so, again, look forward to being asked to make up the difference in higher taxes sometime soon.

Saturday, June 25, 2011

When you read about a people devastated by poverty and unemployment, basic economic logic and simply human compassion would suggest that higher taxes are the last thing those people need. Which brings us to Fresno County. Due to seasonal factors, its unemployment rate recently dropped from 16.9% to 16.0%; if you believe the former number is a more accurate reflection of the county's economic climate, the fact that 16.9% is almost 8% higher than the national rate, and 5% higher than California's "second-worst in the country" unemployment figure, should help you appreciate how grim things are in Fresno. Meanwhile, one of every 204 homes in the county is in foreclosure (three times the national rate), and as of March nearly half of mortgages were underwater. And the most recent estimates suggest that 21.5% of the county's population lives in poverty. Unfortunately, in spite of these utterly grim numbers, the Fresno Bee reports that higher taxes are what this part of the state is getting.

The Bee reports that the County's farmers will see, on average, a 20% hike in their property taxes this fall. Apparently, new Assessor Paul Dictos doesn't think the farms are paying their "fair share," and has reassessed the value of their properties for the first time in years. And even though the value of Fresno County land has plummeted in the wake of the real estate collapse and subsequent recession, and will continue to decline under Dictos' re-assessment, apparently the farms have gotten dramatically more valuable. The tax hikes will even hit Williamson Act farms, which are supposed to see lower property taxes. Like any good bureaucrat, Dictos sees all this as a positive: "We're going to see a plus. I've made changes, first and foremost, to be fair and equitable ... but the county and schools will benefit." And County Administrator John Navarette, after years of service cuts, says, "It's good that we're not going to lose any more ground."

In reply, we'd have to point out that the county's budget jumped from $41.5 billion in 2004 to a peak of $60.1 billion in 2008, before beginning a very gentle decline. To us, this looks less like unfair and inadequate tax collection and more like a government going on a drunken spending binge that wasn't sustainable. And it seems simply monstrous to us to impose higher taxes and government spending, given the absolutely desperate condition of the county's economy. Helm rancher Don Cameron had this to say about the tax hike: "We already have a lot of additional pressures facing us. Our margins are usually pretty tight. This is going to make it that much more difficult to farm in California." Bad as things are, we can't imagine how grim Fresno County will look if its farms start to shut down.

The San Diego Union-Tribune has an editorial on future of the Sweetwater Union High School District, the second-largest secondary district in California, as it attempts to recover from an avalanche of corruption scandals and years of mismanagement. For us, Sweetwater's story is yet another argument in favor of privatizing education.

Headquartered in Chula Vista and serving that community as well as National City, Imperial Beach, and San Ysidro, Sweetwater has long been known for both the diversity of its student body and its superior academics. Aside from having recently won the San Diego County Academic Decathlon eight years in a row, it has also drawn praise for its "Compact for Success" partnership with San Diego State University; through this program, Sweetwater students meeting various academic requirements throughout their career are guaranteed admission to the university. Unfortunately, since a series of articles by the Union-Tribune's Watchdog group began last fall, the district has become known for something else.

The problems began in 2006, when Jesus Gandara was hired as the superintendent of schools. He came in with a sterling reformer's reputation, having overseen improved academic standards in border-district schools in Texas. And for about four years, things went well, with test scores rising and voters approving a $644 million bond issue to help the district. The first hint of the troubles at Sweetwater came last fall, with news that California education authorities were investigating complaints that the district was offering substandard programs for special-education students. This was followed by reports that Gandara had billed $11,500 to a district credit card for 303 meals between 2009 and 2011, over and above his monthly $800 expense allowance. Then came reports that Gandara had invited district contractors to a bridal party for his daughter where a "money tree" was present; in other words, he invited contractors who could benefit from his decisions to a party where they could give cash gifts to his daughter. Also not to be forgotten was Gandara's decision to hire two public relations firms without informing the district's trustees. And the revelation of the possibly illegal borrowing of $40 million in bond funds for day-to-day expenses, as well as a plan to borrow $58 million more. And the allegations of conflict of interest involving Sweetwater's food service director, Nancy Stewart, who failed to disclose that she runs a company, Careers-To-Go, that supplies brands for Sweetwater's campus food courts. And, most seriously, evidence that at least one Sweetwater principal had forged student grades to improve his school's graduation rate. You might be starting to a see a pattern.

Growing outrage led to Gandara's ouster on Tuesday. Of course, since these are public-school bureaucrats we're talking about, the district is taking care of Gandara. By declining to fire Gandara with cause, he will receive 18 months in severance pay, a total payout of over $415,000. Moreover, his accumulated vacation and sick time will allow him to remain on the payroll until September 1, which will allow him to vest in his pension. Apparently, not even the local teachers' union appreciates the stench coming from this deal; the union's president, Alex Anguiano, said, "What it appears was that the district was moving to ensure he was vested in STRS. At that point in time he will be vested and he will be receiving a retirement package that really in my opinion was undeserved. He has really only been [in] our state four and a half years. It essentially amounts to the plundering of our retirement system." In the short run, of course, the district's priorities are clear: find a new superintendent, and conduct a thorough audit of all its operations. But the manner in which it's resolved Gandara's disastrous tenure says something about how deep Sweetwater's problems run. If the board is willing to effectively reward someone like Gandara, that should tell you all you need to know about how it views the concept of accountability.